DBRS Assigns AAA Rating to Sweden, Trend Stable

DBRS Ratings Limited (DBRS) has assigned issuer ratings of AAA to the Kingdom of Sweden’s long-term foreign and local currency debt. The trend on both ratings is Stable. The ratings reflect Sweden’s wealthy and highly diversified economy, strong political institutions and sound macroeconomic management. In addition, the ratings are underpinned by Sweden’s strong fiscal position with a moderate debt burden, a high level of monetary and exchange rate flexibility and large current account surpluses.

Sweden’s fiscal position is healthy by international standards and has proven resilient throughout the 2008-2009 financial crisis thanks to a robust fiscal framework, which has proven effective in ensuring predictable and sustainable government finances. As a result, in contrast to most European countries, Sweden’s structural primary balance did not deteriorate significantly, financing needs remained low and public debt remained moderate, increasing marginally in 2009 and returning to a negative trend in 2010. Moreover, Sweden adhered to its fiscal rules, while also delivering a substantial fiscal stimulus in the context of a large contraction in real output by over 7% from peak to trough in 2008-09.

Despite these strengths, DBRS notes that Sweden faces challenges stemming from the long-term fiscal pressures arising from an ageing population and a relatively highly indebted private sector, particularly households, and elevated house price inflation. Household debt as a percentage of GDP was approximately 86.4% in 2010, which is significantly above the European average. In addition, the Swedish banking sector is subject to some funding risks related to its significant reliance on foreign wholesale funds. This leaves the sector vulnerable to potential market disruptions should liquidity constraints in Euro zone capital markets intensify.

As a small and very open economy with gross exports accounting for almost half of GDP, Sweden was particularly exposed to the global economic downturn in 2009. Its economy, however, recovered earlier than other Euro zone countries thanks to the prompt macroeconomic response of expansionary monetary and fiscal policy and the Swedish krona’s sharp depreciation, which helped to contain the depth and length of the recession.

Economic activity quickly recovered in 2010 and 2011, mainly driven by strong performance from exports, with GDP expanding by 6.1% and 3.9%, respectively, and unemployment declining to 7.5% in 2011 from its mid-crisis peak of over 9%. For 2012, the Swedish government expects economic growth to slow to 0.4%, following the deceleration in global growth, weaker domestic demand and the adverse impact of the Swedish krona’s appreciation in 2012 on competitiveness and exports. GDP growth is set to gradually recover in 2013 and 2014, with expected average growth of 3.5% per year.

DBRS believes that Sweden is in a relatively strong position to manage the economic slowdown. Public finances are resilient and provide scope for fiscal policy measures if the economic environment were to deteriorate. The 2012 fiscal stance is set to be marginally expansionary, with the budget deficit projected at 0.3% of GDP returning to a surplus of 0.3% of GDP in 2013. General government debt, estimated at 38.4% of GDP in 2011, is well below the European Union average and is expected to fall to approximately 35% in 2013.

The AAA ratings also reflect Sweden’s well-established institutional framework and strong fiscal resilience. The strength and credibility of the rules-based fiscal framework put in place in the second half of the 1990s has been underpinned by the broad political commitment to sound public finances as a widely accepted national objective. Moreover, DBRS notes that the fiscal rules set by the government, and their close oversight by the independent Fiscal Council, create an important constraint against any relaxation in fiscal discipline.

Throughout the financial crisis, tensions in the banking sector were contained thanks to the prompt intervention from the Swedish authorities by means of aggressive monetary policy and unconventional policy measures to support the financial system. Nevertheless, the banking sector is large relative to GDP and also highly concentrated, representing a significant contingent fiscal risk. DBRS notes, however, that the banking system’s resilience has strengthened considerably in the wake of the crisis, with the major banks having raised capital to well above regulatory requirements. Moreover, Swedish banks have a very small exposure to peripheral European economies, and loan loss exposures to the Baltic economies have also fallen significantly.

The Stable trend on the Kingdom of Sweden’s ratings reflects DBRS’s expectation that the ratings will be supported by the country’s track record of political stability, fiscal and monetary flexibility, competitive economy and solid external position. DBRS expects that these strengths will allow Sweden to respond appropriately to slower economic growth and weather market volatility in the medium to long term.

Notes:
All figures are in Swedish Krona (SEK) unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the Swedish Ministry of Finance, Sveriges Riksbank, the Swedish National Debt Office, Statistics Sweden, Eurostat, IMF and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Giacomo Barisone
Rating Committee Chair: Roger Lister
Initial Rating Date: 17 April 2012
Most Recent Rating Update: 17 April 2012

For additional information on this rating, please refer to the linking document under Related Research.